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Use the following information to answer the questions on this page. (5 each)
Whitney Point Industries: Market Value Balance Sheet ($ Millions) and Cost of Capital
|
Assets |
|
Liabilities |
|
Cost of Capital |
|||
|
Cash |
0 |
Debt |
200 |
Debt |
6% |
||
|
Other Assets |
500 |
Equity |
300 |
Equity |
12% |
||
|
Tax rate |
35% |
||||||
Whitney Point Industries New Project Free Cash Flows
|
Year |
0 |
1 |
2 |
3 |
|
Free Cash Flows |
-$100 |
$40 |
$50 |
$60 |
Assume that the risk of this new project is similar to Whitney Point’s existing assets and the firm wants to hold constant its debt to equity ratio.
a.) Compute Whitney Point’s weighted average cost of capital. Show work.
b.) Compute the NPV for Whitney Point’s new project. Show work.
c.) Compute the “Debt Capacity” for Whitney Point’s new project in year 0. Hint: if Whitney Point will keep its debt-to-equity ratio the same after taking this new project, how much more debt will the firm add? Show work.
d.) Whitney Point’s existing $200 million in debt is perpetual and has an annual coupon of 6%. Therefore, Whitney Point pays only interest on this debt.Compute the present value of interest tax shields. Show work.
